Exaggerating the rise of the Yuan
The internationalization of the Chinese yuan has been a major story this year. We have been suspicious that much of what passes for the internationalization yuan has been the “Sino-ificiation of Hong Kong and symbolic measures like numerous swap lines, none of which have been used.
That Chinese trade with its special administrative region Hong Kong should be conducted in yuan should hardly been seen as internationalization of the currency or the increase in the importance of the yuan globally. It is a stretch to even consider trade between Hong Kong and the mainland as international trade any more than trade between New York and Texas would be.
The numerous swap lines are more interesting, but these are largely for show. The lack of use reflects the lack of need. Admittedly the swap lines may be more important for those centers, like London, Singapore, Zurich and the like that want to be offshore centers for RMB activity.
Earlier today, the Sate Administration of Foreign Exchange (SAFE) indicated that Chinese companies had falsified $2.5 bln of foreign exchange transactions in the first eleven months of the year. It reports that 112 companies were involved, of which 41 are facing administrative actions and 12 are believed to have broken the law.
Even this may be the tip of the proverbial iceberg. The fact that SWIFT reported that the yuan had moved into second place behind the dollar in trade finance captured imaginations, with many once again trumpeting the demise of the dollar. Yet, as it turns out, this too may have been inflated. It appears that trade finance (e.g. letters of credit) that saw an increase in yuan use may reflect efforts to disguise capital flows as trade flows. Letters of credit is one way to access the relatively high interest rates in China.
The overwhelming majority of yuan trade finance was with Hong Kong (again), Singapore and Chinese companies. According to SWIFT, the yuan had surpassed the euro in trade finance in January 2013 and again in March 2013, and then fell back into third place as the government crack down on fake trade invoicing. Actual trade settlement in yuan has failed to keep up with its use in trade finance. It accounts for less than 1% of the global total, a lower share than Thai baht and Swedish krona.
The Commerce Ministry announced today it was removing some controls on yuan investment. It appears that approval that for up to CNY300 mln investment is no longer required. Rules that were previously announced for financial guarantees, financial leasing, small loan and auction industries appear to have been lifted. Restrictions on investment in cement, steel, shipbuilding and electrolytic aluminum appear to also have been lifted. At the same time, officials reiterated that foreign companies cannot use cross-border yuan (CNH) to invest in Chinese securities, derivatives or used for trust lending.